Interactive Investor

ii view: Starbucks held back by Covid in China

6th February 2023 15:20

by Keith Bowman from interactive investor

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This coffee titan operates in around 80 countries and will soon be headed by a new chief executive. We assess prospects. 

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First-quarter results to 1 January 

  • Global comparable store sales up 5%
  • Revenue up 8% to $8.7 billion
  • Adjusted Earnings per share up 4% to 75 US cents 

Interim chief executive Howard Schultz said:

“Starbucks performance in Q1 demonstrates the strength and resilience of our business and accelerating demand for Starbucks Coffee all around the world. We posted today's strong results despite challenging global consumer and inflationary environments, a soft quarter for retail overall and the unprecedented, Covid-related headwinds that unfolded in China in Q1.” 

ii round-up:

Global coffee chain Starbucks Corp (NASDAQ:SBUX) has detailed quarterly earnings which missed Wall Street forecasts as another wave of Covid in its second biggest market China hindered performance. 

First-quarter earnings rose 4% year-over-year to $0.75 per share , missing estimates of $0.77. Revenues for its China business declined by almost a third compared to the first quarter of 2022 to $622 million, despite a 10% rise in stores to 6,090. More than 1,800 stores were forced to close at the height of this latest Covid disruption. 

Starbuck shares were mixed in post results trading, although remain up by 10% over the last year. That’s similar to restaurant group Chipotle Mexican Grill Inc (NYSE:CMG), but contrasts with a near 8% fall for the S&P 500 index. 

The company reiterated its 2023 forecasts, with sales expected by management to rise by between 10% and 12%, and for adjusted earnings per share to gain by 15% and 20% versus 2022. 

But with China still finding its feet following its reopening from the pandemic, second-quarter sales are now also expected to prove negative, with gains forecast for the second half. 

Sales for the US, its biggest market, rose by 15% during this latest quarter to $6.1 billion, helped along by a 3% increase in overall store numbers to 15,952.  

Overall sales for the quarter of $8.7 billion hit another record, aided by rising product prices and a net new opening of 459 stores to a total of 36,170.  

ii view:

Founded in 1971 and headquartered in Seattle, Washington, Starbucks today operates in around 80 countries. Across its global store total, some 51% are company operated and 49% are licenced out or franchised with 61% of its total store outlets located across the US and China. 

During interim head Howard Schultz's latest stint in charge of Starbucks, management is pushing initiatives to improve training, speed up the time it takes to make drinks including iced beverages via new equipment and automation, and expand its number of drive-thru stores. Laxman Narasimhan, formerly of Reckitt Benckiser Group (LSE:RKT), is set to head the Nasdaq listed company from April. 

For investors, continued disruption caused by Covid in China cannot be ignored, relations between the US and China remained strained, costs generally such as energy and wages offer headwinds, while environmental and climate change issues remain firmly on the agenda of big business. 

On the upside, product price rises have helped to counter elevated costs, the return of its former head has injected vigour back into its strategy, new stores are still being opened, and the incoming boss has experience in revitalising corporate growth.  

On balance, and with the world’s love affair with coffee showing little sign of ending, investors are likely to keep backing this global success story.

Positives: 

  • Diverse geographical footprint
  • Achieved record sales

Negatives:

  • Elevated costs
  • Covid hindered China outlets

The average rating of stock market analysts:

Strong hold

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